In Diversification We Trust?

The EDHEC-Risk Institute is no slouch at touting for publicity. Its most recent effort in that direction is to draw attention to an article published in the winter 2011 (repeat, yes WINTER 2011, though that will come as little surprise to those of us shivering in a middle England summer) issue of The Journal of Porfolio Management by Noël Amenc, director, and Lionel Martellini, scientific director, EDHEC-Risk Institute.

In an article entitled In Diversification We Trust? the authors state that by focussing on security selection decisions as a single source of added value, the investment industry has somewhat distracted from another key source of added value, namely, risk management.

However, there are some misconceptions about risk management and blaming this concept for not protecting investors in 2008 merely signals a lack of proper understanding of the true nature of risk diversification.

Recent EDHEC-Risk research shows that while diversification is most effective in extracting risk premia over reasonably long investment horizons, hedging and insurance are better suited for loss control over short horizons. Furthermore, new forms of investment solutions should rely on the use of improved performance-seeking and liability-hedging building-block portfolios, as well as on the use of improved dynamic allocation strategies.

The institute helpfully adds that this article is related to two EDHEC-Risk publications which readers can download through the following links: 
- New Frontiers in Benchmarking and Liability-Driven Investing - A Post-crisis Perspective on Diversification for Risk Management.